Telecom consolidation will help in economies of scale
With the big bang entry of Reliance Jio, the subscriber base of other telecom players in the industry has compelled them to follow the mantra of “survival of the fittest”. Reliance Jio’s entry forced big operators namely Bharti Airtel, Vodafone, and Idea to slash prices.
India is a $40 billion telecom industry. To survive and sustain in the competitive market, the telecom industry is going through a major consolidation. The merger of Vodafone’s Indian subsidiary with Idea Cellular aims to create a level playing field with Jio and to carve a niche in the ongoing price wars. The merger is expected to bring about $ 10 billion worth of synergies.
On Feb 23, Bharti Airtel announced that it had entered a definitive agreement with Telenor South Asia Investments Pte Ltd to acquire Telenor (India) Communications Private Limited. Further, the imminent merger of Rcom with Aircel is another classic example of consolidation in the industry.
The consolidation drive is not just limited to telecom operators’ space but has taken hold of ancillary operations as well as of towers. RCom is currently in the process of selling its tower business to Brookfield for $1.6 billion. Bharti Infratel and Indus Towers may also see a change in control with divestment.
Given the escalating cost of doing business, the revenue opportunity is decreasing. The ARPU (average revenue per user) decline now is sharp and steady, which, combined with serious losses, has prompted the Indian telecom industry to look at consolidation as the only way to maintain revenues. Idea has reported a consolidated net loss of Rs. 383.87 crore in the quarter ended December 31, 2016 and Bharti Airtel reported a 55 per cent fall in its net profit for the third quarter at Rs. 504 crore.
In definitive terms, how far these consolidation deals will help the players in this field is a multibillion dollar question. The right answer for this question lies in waiting and watching what the future has in store for these companies. But consolidation at this point of time, is considered good by the industry as it would lead to greater economies of scale, optimum utilisation of spectrum and efficient use of marketing spend by the companies.
However, these M&A activities in telecom industry and market consolidation is a big positive for the customer in terms of service, content, and cost efficiencies.
The ongoing consolidation may not be good in terms of job creation as the consolidation will pave the way for layoffs with more than 2.5 lakh employees becoming redundant in the framework. The next 1.5 years will see the impact of this activity.
The telecom business going forward, may see major consolidation and in the entire shake out, maybe a few players will emerge and the market may witness an oligopolistic scenario. But the oligopolistic scenario, if it emerges, has a flipside too i.e. fear of polarisation. However, with strong regulatory, any oligopolistic tendencies may be curtailed.
(The writer is director, Firstcall India Investment Banking)